FOREX OPERATIONS

CHAPTER 1

RATIONALE FOR THE STUDY

FOREX is the generic term for the worldwide institutions that exist to exchange or trade currencies. This foreign exchange market is an Over The Counter (OTC) market. There is no central exchange and clearing house where orders are matched. FOREX dealers and market makers around the world are linked to each other around-the-clock via telephone, internet, and fax, creating one cohesive market. Since FOREX is a decentralized market, it will have multiple market makers - all of whom have the right to quote different prices. Since there is no centralized exchange, competition between market makers prohibits monopolistic pricing strategies. If one market maker attempts to drastically skew the price, then traders can easily find another market maker whose price is set by supply and demand. Likewise, if one market maker attempts to drastically widen the spread, then traders can easily find another market maker with a normal spread. This is a big advantage over a centralized market which could be monopolistic with a single specialist controlling the market of a specific asset, allowing prices to be skewed to accommodate the interests of the specialist rather than those of the traders. Recently technology has broken down the barriers that used to stand between the end-users of foreign exchange services and the interbank market. In the interbank market, the largest banks can deal with each other directly, via interbank brokers or through electronic brokering systems like EBS or Reuters. The online trading revolution opened its doors to retail clientele by connecting market makers and market participants in an efficient low cost manner. Average traders can now trade alongside the biggest banks in the world, with virtually similar pricing and execution. What used to be a game dominated and controlled by large institutions is becoming a level playing field where individuals can profit and take advantage of the same opportunities as big banks. One does not need to be on the trading floor to be involved in the forex market. Today, forex trading can be done from home on a computer through the internet. The forex market is basically a worldwide connection of traders, who make investment moves based on the price of currencies, or their values relative to other currencies. These traders constantly negotiate prices with other traders resulting in small fluctuations or movements of a currencys value. The value of a currency on the forex market also corresponds with supply and demand. If there is greater demand for the Euro, there will be less supply of it on the forex market, which will tend to increase the price of a Euro relative to other currencies. Analyzing the forex markets fluctuations allows investors to

FOREX OPERATIONS
make predictions on how a currency will move in relation to another currency, influencing their buy and sell decisions. Although there are many large players in FOREX, it is now accessible to the small investor due to recent changes in the regulations. Previously, there was a minimum transaction size and traders were required to meet strict financial requirements. With the advent of Internet trading, regulations have been changed to allow large interbank units to be broken down into smaller lots. Each lot, worth about $100,000 is accessible to the individual investor through loans extended for trading. Typically, lots can be controlled with a leverage of 100:1 meaning that US$1,000 will allow one to control a $100,000 currency exchange. This greatly magnifies the potential reward from the transactions, as well as the risk. The buying and selling of currencies is necessary to support trade between countries in today's global marketplace and, as the major world currencies fluctuate against one another there is, and will continue to be, money to be made from currency transactions. The major players in the market are of course buying and selling in single deals often running into many millions of dollars. The smaller players however, the brokerage houses and individual brokers, are often trading in individual deals of as little as one hundred thousand dollars. The foreign exchange market is unique because of Its trading volumes, The extreme liquidity of the market, Its geographical dispersion, Its long trading hours: 24 hours a day except on weekends (from 22:00 UTC on Sunday until 22:00 UTC Friday), The variety of factors that affect exchange rates. The low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes) The use of leverage

FOREX OPERATIONS
CHAPTER 2

OBJECTIVE OF THE STUDY

No report is presented or work is done without any objectives. The objective shows why the report has been presented.

Following are the objectives:

To study the various aspects of Forex Operations i.e. Pre-shipment and Post-shipment credit. To know what is Forex Operations To understand the Forex Operations. To study the provisions To know what are the export promotional schemes of the Government.

Limitations:
The project was undertaken at Bank of Maharashtra. The data is so confidential that there are certain limitations on getting the data and on disclosing it. Also the duration for completion of the project is not sufficient to cover all schemes, provisions and other documents related to export finance.

SCOPE: The topic mainly focused on: Procedure of export finance. Letter of Credit and UCPDC. FEMA provisions Institutions governing the export credit.

FOREX OPERATIONS RESEARCH METHODOLOGY:

Research is an important aspect of any project. It is a systematic collection, recording and analysis of data concerning the relative issues. The principle objective of this task is to unfold certain facts regarding a predicted area of inquiry. The research is carried out in the following manner:

1. Primary Data:
Data that is collected for specific purpose at hand is called as primary data. In this project primary data is collected by visiting exporters. This survey was done with the help of objective type of questionnaires. The structure and questionnaire is according to the objective of the project. In survey, direct interview method is used for collecting the primary data. The interviewers are the employees or proprietor of the export firms. The data is also collected through interview of bank executives and officers.

2. Secondary Data:
Secondary data is defined as the data that has been collected earlier for some purpose. In this project, the data received from bank is used as secondary data. The secondary data also collected from various websites and books.

3. Analysis:
The fact and data collected were processed with a view to reduce them to manageable proportion. Only by such a careful and systematic planning processing, the data collected will lend itself for statistical treatment and meaningful interpretation leading to formulation of a theory or a finding. Thus, the data processing comprises of editing coding, categorizing and tabulation.

4. Presentation of report:
After analysis and tabulation is completed, the next step is usually a presentation of the major findings and suggestions.

FOREX OPERATIONS
CHAPTER 3 PROFILE OF THE BANK

3.1 BANK OF MAHARASHTRA PROFILE The Birth The bank is registered on 16th Sept 1935 with an authorized capital of Rs 10.00 lakh and commenced business on 8th Feb 1936. The Childhood Known as a common man's bank since inception, its initial help to small units has given birth to many of today's industrial houses. After nationalization in 1969, the bank expanded rapidly. It now has 1421 branches all over India. The Bank has the largest network of branches by any Public sector bank in the state of Maharashtra The Adult The bank has fine tuned its services to cater to the needs of the common man and incorporated the latest technology in banking offering a variety of services. Our Vision Statement To be a vibrant, forward looking, techno-savvy, customer centric bank serving diverse sections of the society, enhancing shareholders and employees value while moving towards global presence. Our Logo The Deepmal With its many lights rising to greater heights. The Pillar Our institution- Symbolising strength. The Diyas Our Branches- Symbolising service.

FOREX OPERATIONS
The 3 M's Symbolising * Mobilisation of Money * Modernisation of Methods and * Motivation of Staff.

Aims

The bank wishes to cater to all types of needs of the entire family, in the whole country. Its dream is "One Family, One Bank, Bank of Maharashtra ".

The Autonomy The Bank attained autonomous status in 1998. It helps in giving more and more services with simplified procedures without intervention of Government.

Our Social Aspect The bank excels in Social Banking, overlooking the profit aspect; it has a good share of Priority sector lending having 38% of its branches in rural areas.

Other Attributes Bank is the convener of State level Bankers committee. Bank offers Depository services and Demat facilities at 131 branches. Bank has a tie up with LIC of India and United India Insurance Company for sale of Insurance policies. All the branches of the Bank are fully computerised.

FOREX OPERATIONS Future Plans - Vision 2009

To cross the Business Level of Rs.85, 500/- Crores by March 2009. 19.84% Growth in Savings Bank Deposits and average Saving Deposits growth rate of 17.69%. 19.65% Growth in Current Deposits and average Current Deposits growth rate of 17.29 Systematic approach for reducing Net NPA level to below 1% 64 Branches are proposed to be opened at new business centres and 3 extension counters to be converted into full fledged branches. 4 Currency Chests to be opened. ATM network to be increased from 345 to 500 Biometric ATMs to be introduced at selected branches. Introduction of Internet banking, Mobile banking and Phone banking. SHGs with special reference to agriculture to be promoted and financing are implemented so as to increase financing to small and marginal farmers. Financial Inclusion to the unbanked section of the population.

3.2 BUSINESS FIGURES OF FEX CENTRE: Table: 3.1 YEAR 2005-06 2006-07 2007-08 2008-09 (Rs. In lakhs) TARGET 31500 37500 50000 38500

ACTUAL BUSINESS 26450 37669 34500 44800

50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 2005-06 2006-07 2007-08 2008-09

Actual Business Target

FOREX OPERATIONS
CHAPTER 4 INTRODUCTION TO FOREIGN EXCHANGE Foreign trade takes place between different sovereign countries having different monetary units, different rules and regulations governing foreign trade, different legal system .Hence exporters and importers participating in trade have their own compulsions. Thus, the exporters want money for the goods exported or services provided in the currency of the country he resides, the importer on the other hand can pay for the goods imported in the currency of the country .This is where foreign exchange comes into play and helps convert one currency into another and smoothen the flow of international trade and monetary resources. Foreign exchange is a mechanism by which the currency of one country is converted into currency of another country. Forex operation can be critical and risky so government tried to develop a systematic process and regulated it. The FEMA [Foreign Exchange Management Act] is the law which regulates the forex market .The regulatory authority for the Indian forex market is the RBI. The RBI issues Guidelines/regulations/instructions from time to time which govern the functioning of the market .Only A.Ds [Authorised Dealers] licensed by the RBI can participate directly in the forex market. These are usually schedule commercial banks. Foreign exchange operations can be regulated and controlled by following guidelines: 1. Trade Management-Managed by ministry of Finance through DGFT Import & Export - Foreign Trade Policy (2004-09) 2. Exchange management -Managed by ministry of Finance through Reserve Bank of India (RBI) - Authorised dealers 3. UCPDC -Managed by International Chambers of Commerce (ICC) - defines set of rules governing L/C 4. ECGC -Managed by ministry of Commerce- through board of directors representing Govt, Banking, trade & industry 5. Bank Policies -Services charged -Internal documentation -Finance -Security

FOREX OPERATIONS
4.1 ROLE OF BANKS IN FOREIGN TRADE Banks play a vital role .They perform many functions but the most important one is that they are the intermediaries through whom documents are exchanged for money between exporters and importers .They are also the extended arms of RBI in the administration of FEMA. Every commercial bank deals in foreign exchange since it is an activity with good potential for profits. But broadly we could classify the functions into: 1. Finance of exports 2. Finance of import, letters of credits 3. Remittances and other miscellaneous services like travellers cheque, currency encashment, credit card transactions, etc. 4. Dealings, rates of exchange. 5. MIS, returns and statistics. Finance of exports: This is divided into financing activities and other export related activities. The financing activities are further subdivided into (a) Pre-shipment finance, (b) Post-shipment finance. Pre-shipment finance is also known as packing credit and it is the advance given to an exporter for procuring raw material, processing and preparing it for exports after packing the same. Post shipment finance on the other hand is providing finance after the goods are shipped and the documents are submitted to the bank .The other export related activity consists of advising, conforming the letter of credit, issuance of related certificates, export guarantees.

EXPORTS

Pre shipment Finance

Post shipment finance 1. Bill purchase 2. Negotiation

Other export related services

FOREX OPERATIONS
Finance of imports: The import department does all the banking activities pertaining to the import of goods to India .This includes opening of import letter of credit, retirement of bills under letter of credit and collection bills. Issuance of guarantee pertaining to imports, import loans, etc.

IMPORTS

Letter of Credit

Inward collection bill

Other import related services: 1. Guarantees 2. Import loans 3. ECGC, Premium, etc

Remittances: Remittances department would deal with the issuance and payment of demand draft, telegraphic transfers, mail transfers, issue and encashment of travellers cheque, sale and encashment of foreign currency notes, maintaining non-resident accounts, etc. Dealings: Banks buy and sell foreign currencies from and to the public. To carry out these functions they need to keep stock of currencies with the team and also maintain bank account abroad. This department does rate computation, that is, it gives the exchange rate for all currencies. It maintains foreign currency accounts with bank abroad .It books forward contracts (both sale and purchase) on behalf of its customers and undertakes cover operations and exchange dealings . MIS, Returns, and Statistics: This department is responsible for submission of returns and statistics to RBI and also to the banks head office, collecting and providing of credit information for and behalf of their constituents.

10

FOREX OPERATIONS
4.2 CORRESPONDENT RELATIONSHIP: To facilitate dealings in foreign exchange, a bank in India maintains accounts with banks abroad. Similarly some foreign banks may maintain accounts with Bank of Maharashtra. In banking terminology these are known as Nostro account, Vostro account, and Loro account. a) Nostro Account: Nostro means our account with you. e.g.: Bank of Maharashtra maintains an account with Nat west bank, London. b) Vostro Account: The account opened by a foreign bank in Indian rupee with an Indian bank would be referred by all correspondence by Indian banks as vostro account, meaning your account with us. c) Loro Account: Loro account means their account with you. e.g.; Bank of Maharashtra has an account in US dollars with Chase Manhattan Bank in New York. When Bank of Baroda wishes to refer the account of Bank of Maharashtra with Chase Manhattan bank it would refer to it as Loro account.

11

FOREX OPERATIONS
CHAPTER 5 FEMA GUIDELINES TO EXPORT AND IMPORT 5.1 IMPORTS: a) Payment of imports: Payments are required for the following purpose: 1. Payment towards receipt of bill drawn under L/C- DA/DP. 2. Advance remittances for future imports. 3. Foreign inward bills for collection DA/DP without L/C. b) Obligation for purchase of Foreign Exchange: 1. Section 10[6] of FEMA provides that the person acquiring exchange is permitted to use it either for the declared purpose or for any other purpose for which acquisition of exchange is permissible under FEMA. 2. If forex is utilised for import of goods, the AD should ensure that the importer furnishes proper evidence for import. c) IEC Number: IEC number is the Import-Export Code Number and is compulsory to be obtained from the DGFT (Director General of Foreign Trade), GOI for import of goods into India. Exemptions: 1. Ministry/departments of central or state government. 2. Person importing/exporting goods for their personal use. d) Import ability of goods: 1. A.Ds may freely open LCs and allow remittances for import of goods only if the goods to be imported are freely importable or the importer holds the Exchange Control copy of valid Import license issued by DGFT, if the commodity falls under restricted category. 2. Exchange control copy of license when fully utilised, to be retained by A.Ds and preserved for scrutiny by the internal audit for one year after inspection. e) Prescribed application forms: 1. Application for making payment exceeding USD 500 towards imports must be made on appropriate FORM A-1. 2. Remittances in foreign currency. 3. Transfer of rupee to non-resident bank account.

12

FOREX OPERATIONS

f) Manner of rupee payment by Importer: 1. Payment for importer bills irrespective of the amount should be received necessarily by way of debit to importers amount. 2. Crossed cheque drawn by importer on his bank. 3. Under no circumstances should the AD accept cash payment. g) Import of goods: A.Ds should endorse on exchange control copy the details of LCs opened/forward contracts booked or remittance made in foreign currency and also insurance and freight paid. h) Evidence of import: 1. Where remittances for import exceed USD 1,00,000/- or its equivalent A.Ds to insist on - EC copy of bill of entry for home consumption. - In case of 100% EOUs the EC copy of bill of entry for warehousing. - Postal appraisal certificate in case of imports by post. - In case of imports through non-physical form data, designs through e-mail/fax a certificate from chartered account of receipt of import to be obtained.

2. A certificate from CEO or auditor of the company that the goods for which remittances was made have actually been imported into India provided : The importer is a company listed on a stock exchange in India. Whose net worth is not less than Rs.100 crores on date of last audited balance sheet The importer is a public sector company or an undertaking of government of India or its departments. Also extended to autonomous bodies including scientific bodies/academic institution such as Indian institute of science/technology. i) Follow up by A.D.: 1. If documentary evidence is not furnished within 3 months from date of remittance where amount is above USD 100000/-.AD should rigorously follow up for next 3 months including issue of regd. of letter to the importer. 2. A.Ds to forward BEF statement to RBI within 15 days at end June and December.

13

FOREX OPERATIONS

j) Guidelines for handling Import Bills-Operating procedure: 1. Care should be taken to ensure that the importers are genuine. 2. If the bank is not fully satisfied with the financial status of the importer they should obtain a bankers report or credit report on overseas supplier. 3. Instructions on disposal/payment of import bill should be given after taking account. 4. The customer is banking with the bank for a long period. 5. He has availed of the credit facilities from the bank 6. The balance sheet of the customer has been examined. 7. A.Ds should maintain a separate import bill registers to record particulars in chronological order of import bills received directly from the sellers. 8. Brief comment about the customer as mentioned earlier must be recorded in this import bill register so that can be suitably cross checked at a later date. 9. AD should note to endorse on the Exchange Control Copy of import license the details of LCs opened or forward contract booked or remittances made in foreign currency as also the amount of insurance and freight paid by the importer in local rupees under the stamp and signature. 5.2 EXPORTS: a) Declaration of Exports: 1. Declaration in form GR/SDF: - The declaration in the form GR/SDF shall be submitted in duplicate to the Commissioner of Customs. - After duly verifying and authenticating the declaration form, the commissioner of Customs shall forward the original declaration form /data to the nearest office of the reserve bank and hand over the duplicate form to the exporter for being submitted to the authorised dealer. 2. Declaration in form PP: -The declaration in the form PP shall be submitted in duplicate to the authorised dealer named in the form. - The authorised dealer shall, after counter signing the declaration form, hand over the original form to the exporter who shall submit it to the postal authorities through which the goods are being despatched the postal authorities after dispatch of goods shall forward the declaration form to the nearest office of the reserve bank.

3. Declaration in form softex: -The declaration in the form SOFTEX in respect of export of computer software and audio/video/television software shall be submitted in triplicate to the designated official of department of electronics of government of India at the Software Technology Parks of India (STPIs)

14

FOREX OPERATIONS

b) Exemption for declaration of export form: 1. 2. 3. 4. 5. 6. 7. Export of good /software of value not exceeding USD 25000/-. Gifts of goods of value not exceeding Rs.5, 00,000. Air craft engines and air craft overhauling and re-import to India within 6 months. Goods imported free of cost on re-export basis. Import goods found defective for replacement. Goods imported on loan basis. Goods sent abroad for testing purpose.

c) Mode of receiving payment: 1. 2. 3. 4. Through an AD. From NRE/FCNR account. By a DD/CHEQUE/FTC/ICC/FC notes. Gems and jewellery units in SEZ AND EOUs can receive payment in precious metals. 5. GOLD/SILVER/PLATINUM.

d) Prescribed time limit for realisation of bills: 1. Generally 6 months 2. Large value exporter of certain selected products which are internally competitive and have high value addition. With contracts of Rs.100 crores and above in one year. 3. Status holder 12 months 4. SEZ units: no time limit 5. Export to Indian owned warehouse abroad set up with permission of RBI: 15 months Extension of time limit: 1. The exporter should apply in form ETX to RBI through AD 2. AD can permit extension beyond 6 months irrespective of invoice value (earlier 1 USD million) initially for 6 months subjected to reporting to RBI in XOS statement. e) Overdue Bills: 1. Change in buyer is permitted without the approval of RBI. 2. Write off by the exporter is permitted if amount is not for realized for one year or more if each writes off does not exceed 10% of the total export proceed of the exporter during the previous year. 3. In case of status holder 5% of their average annual realization during the preceding 3 financial years or 10% of exports proceeds due during the financial year whichever higher can be written off CAs certificate required. 4. All such write off to be reported to RBI in EBW form 5. The incentive to be funded against such exports. 6. The default should be genuine. NO pending civil or criminal suit.

15

FOREX OPERATIONS
CHAPTER 6 INTERNATIONAL FINANCE Settlement of International Debts: Buyers and sellers get together to negotiate and subsequently enter into a contract. Depending upon the relative bargaining power of the importer and exporter the method of payment would be decided. Generally an export import contract could be settlement in any one of the following methods: Advance remittances Open account Consignment sale Bills for collection Letters of credit 6.1 Advance Remittance: In this case the exporter requires the importer to make full payment in advance for the goods to be exported. Features of this type of transactions are: (a) This is possible only in sellers market. (b) The importer has to rely on the integrity of the exporter and his capacity to execute the contract in time. (c) The transaction is financed by the importer which entails higher cost, and also risk is entirely shouldered by him. (d) Exchange control regulations of certain countries may prohibit advance payment by the importer. (e)Indian exchange control permit payment in advance for import of merchandise / consumers goods as also capital goods. 6.2 Open account: Under this method goods are dispatched directly to the buyer who takes the delivery without making payment and makes payment at a future date. Features: This is reverse of advance payment The goods are taken possession of by the buyer without payment and the payment is made at a pre determined future date. This is possible only in buyer market. 6.3 Consignment sale: In this case the goods are consigned to the agents of the exporter abroad and after the sale the proceeds are reemitted to the exporter. Features: Proceeds of the consignment are remitted only after the sale has been made by overseas agent.

16

FOREX OPERATIONS
6.4 Bills of Collection: In this case goods are dispatched to the importers country and the relative documents are forwarded through the bank, which acts as an agent for collection of the proceeds of the transaction. Features: This method is not biased in favour of either party-importer/exporter. The exporter draws a bill of exchange on the importer, and the documents of title to goods are released only after the payment is received. The exporter faces the risk of non-payment and in case of the importer refusing to take up the documents against payment, he incurs additional cost. 6.5 Letter of Credit: The letter of credit (L/C) is a document which is issued by the importers bank who guarantees payment to the seller provided the terms and conditions mentioned in the L/C id fulfilled. LETTER OF CREDIT AND UNIFORM CUSTOMS & PRACTICES FOR DOCUMENTRY CREDIT (UCPDC): In a purchase and sale transaction, the essence of the agreement is the confidence and trust that seller must have vis--vis the buyer. A business deal is usually completed in following steps Buyer places he order for the goods with the seller after negotiating the price and terms. Seller executes the order and supplies the goods ordered. The buyer effects the payment to the seller after being satisfied that the goods that he has received are the ones that he had ordered. This cycle is complete once the seller receives his payment from the buyer. In a sale and purchase transaction in international business, geographical distances separate the seller and the buyer, and it is really difficult for the buyer to be fully satisfied about the bonafides of the seller. To avoid these uncertainties the bank steps into the picture by providing a guarantee for this trade. This is done by opening of a L/C. In an L/C, the bank of the buyer guarantees payment to he seller on the production of certain specified documents. Letter of Credit: A letter of credit (L/C) can be defined as an arrangement where in a bank guarantees, on behalf of its customers, to make payment to the beneficiary upon presentation of documents specified in the credit. In other words it is an undertaking by a bank to pay or accept bills provided the beneficiary of the credit fulfils the terms and conditions set forth in the L/C document.

17

FOREX OPERATIONS
a) Application for opening L/C: At first, an importer will request banker to open L/C along with the following documents. 1. An application 2. Indent or Performa Invoice 3. Import Registration Certificate (IRC) 4. Taxpayer Identification Number (TIN) 5. A bank account. 6. Membership of chamber of commerce b) Indent or Performa Invoice: Indent or Performa invoice is the sale contract between seller and buyer in import-export business. There is slight difference between indent and Performa invoice. The sales contract, which is direct correspondence between importer and exporter, is called Performa invoice. There is no intermediary between them. On the other hand, there may be an agent of exporter in importers country. In this regard, if the sale contract is occurred between the agent of exporter and importer then it is called indent. Parties to letter of credit: 1. Buyer /Opener/Importer 2. Opening bank: The bank issuing L/C at the buyers request. It is usually the buyers bank. 3. Advising bank: The bank through whom the L/C is advised. The L/C is sent to the beneficiary through the agents or correspondents of the opening bank in the country where the seller resides. This serves the purpose of authenticating the L/C document to the seller. 4. Beneficiary /Seller/Exporter: in whose favour the L/C is opened. 5. Negotiating Bank: The bank in the sellers country which is authorised to purchase the bills drawn by the seller. 6. Reimbursing Bank: The bank which is designated by the L/C Opening bank to effect reimbursement to the negotiating bank. 7. Confirming Bank: This party may not always be present in every L/C transaction. The role of the confirming bank, which is situated in the country of the seller, provides additional guarantee to the seller. Confirming of L/C is not mandatory.

18

FOREX OPERATIONS
6.6 Uniform Customs and Practices for Documentary Credit (UCPDC): The Uniform Customs and Practices for Documentary Credit (UCPDC) were evolved by the International Chamber of Commerce to define a set of rules governing letters of credit which can be universally accepted by all the participating countries. The UCPDC first appeared in 1933, but did not get universal acceptance. It was revised in 1962, 1974, 1983 and 1993 and almost all the countries have adopted it. This have paved the way for a common understanding of the terms by all parties involved, namely ,banks, insurance companies, shipping companies, traders, etc. In short a Documentary Credit is an undertaking issued by a bank, on behalf of the buyers (importers) ,to seller(exporter), to pay goods and /or services ,provided that the seller presents documents which comply fully with the terms and conditions of the credit. These are advantages to both the buyer and seller when settlement is arranged by documentary letter of credit. Firstly, the buyer knows that payment will only be made if the documents received comply strictly with the terms and conditions of the credit as stipulated by the buyer. Secondly, the seller knows that payment will be received provided the terms and conditions of the credit are strictly complied with. The International chamber of Commerce, Paris, has recently finalised the transaction of UCPDC from UCP 500 to UCP 600.Hence, effective 01st July 2007; all Documentary Credit will be governed as per article of UCP 500 .The main aims of the ICC in revising the provisions were to: Reduce misinterpretations Reduce the number of articles by clubbing them and deleting the repetitive ones. Define the articles in much clearer and simplified language Take advantage of technology. a) Types of Documentary Credit: 1. Revocable letter of credit: A revocable credit is one, which can be amended or cancelled at any time without prior notice or warning to the seller .It involves risks to the beneficiary, as the credit may be amended or cancelled while the goods are in transit and before correct documents are presented. The seller of goods would face the problem of obtaining payment directly from the buyer. A revocable credit gives the buyer maximum flexibility ,as it can be amended or cancelled without prior notice to the seller up to the moment of presentation of documents to the bank at which the issuing bank has made the credit available for payment. 2. Irrevocable letter of credit: An irrevocable credit cannot be amended or cancelled without the agreement of the issuing bank, the confirming bank (if the credit is confirmed) and the seller (beneficiary).An irrevocable credit gives the seller great comfort of payment but is really only dependent upon undertaking of bank abroad . 19

FOREX OPERATIONS
The buyer can request the advisory bank to add its confirmation to an irrevocable credit if he is not satisfied with the assurance of the credit issuing bank. If the advisory bank agrees, the irrevocable credit becomes a confirmed irrevocable credit .For adding confirmation; the bank will charge commission, which may have to be paid by seller. A confirmed irrevocable credit gives the seller a double assurance of payment ,since a bank in the sellers country has now added its own undertaking in addition to that of the issuing bank to pay for the documents drawn under the letter of credit ,provided of course, the documents are drawn strictly in compliance with the terms of credit. 3. Unconfirmed letter of credit: Advising Bank has no engagement or responsibility as regard payment, even conforming document are presented. The Advising Bank will make a decision on ability to effect payment at the time of presentation of documents. The beneficiary will need to assess the country risk concerned before continuing with handling of the credit .It should always be remembered that whilst a bank has issue credit .It might not be able to secure the foreign exchange in order to meet its obligation 4. Confirmed letter of credit: The confirmation constitutes the undertaking of that bank in addition to that of the issuing bank, to effect payment upon presentation at its counter of conforming documents. Therefore in the event the issuing bank to effect payment upon presentation at its counter of conforming documents. Therefore in the events of the issuing bank not being in a position to honour its obligation, the confirming bank will effect payment to beneficiary as prescribed in the credit terms.

5. Red Clause and Green clause Credit: A red clause L/C contains a clause printed in red, authorising the negotiating bank to grant advances to the exporter for purchase, processing and packing of goods. This advance from bill is recoverable with interest from bill tendered under the credit. A green clause L/C is an extension of the red clause credit and covers storage of the goods in name of the bank. Both red and green clause credits have been extensively used in Australian wool trade. 6. Sight Credit: A credit available by sight payment usually allows the nominated bank to debit account of the issuing bank on the presentation of the conforming document. A draft payable sight may be called for, drawn on the nominated bank. In the case of a confirmed credit the nominated bank is nearly always the confirming bank.

20

FOREX OPERATIONS
6.7 THE DOCUMENTARY CREDIT LIFE CYCLE:

21

FOREX OPERATIONS
Presentation of Documents and Payment: 1. Agreement between buyer and seller 2. Buyers applies for issue of a documentary credit 3. Buyers bank issues documentary credit 4. Issuing bank communicates issue of documentary credit 5. Advising bank communicates issue of LC to beneficiary 6. Advising bank adds its own confirmation 7. Beneficiary receives L/C 8. Request for amendment of L/C to the applicant 9. Applicant requests issuing bank for amendment 10. Amendment communication to advising bank. 11. Advising bank communication amendment. 12. Confirming bank communication amendment 13. Beneficiary confirms acceptance of amendment. 14. Presentation of documents to bank. 15. Scrutiny of documents. 16. Discrepancies in documents. 17. Negotiation, acceptance, payment 18. Reimbursement to negotiating bank. 19. Examination by issuing bank 20. Delivery of documents to the buyer 21. L/C utilised, liability reduced. 22. Charges paid.

22

FOREX OPERATIONS
CHAPTER 7 DOCUMENTS In foreign exchange transaction various documents used are as follows: 7.1 Bill of Exchange: A bill of exchange is a negotiable instrument and can be defined as a document in writing drawn by the seller on the buyer for a stated sum of money. A bill of exchange may be drawn on the issuing bank or another drawee bank, but not the importer. Article 9 of the UCPDC makes it clear that where a credit call for bill of exchange on the importer (applicant), banks will consider these as additional documents. In foreign trade a bill of exchange is also referred to as a draft. D/A means document against acceptance ,which means the collecting bank will deliver all the documents to the drawee on the acceptance of the bill of exchange. The payment will be made on the due date by the drawee. D/P means documents against payment; hence in this case unless the payment is made the collecting bank will not release the document to the drawee of bill. 7.2 Commercial invoice: A commercial invoice is the most comprehensive commercial document among the entire set of export document or bills .It is the only document in the whole set that carries complete information about the specific commercial transaction between the buyer and seller. A commercial invoice although not a negotiable instrument is also a claim for payment of goods under the term of the commercial contract. It is addressed to buyer by the seller and signed by the seller. In addition a detailed description of the goods together with unit prices total amount payable showing discount or advance payment made if any, terms of payment ,weight and packing details ,shipping details and marks .It serves as a checklist to all concerned and help to identify a particular consignment. It is also used as main evidence in any assessment of custom duty. 7.3 Packing list: A packing list is usually accompanies an invoice if there are several packages in one consignment. A packing list identifies the content of each package and also its weight marking and measurement .As the name suggests the list for the convenience of inspection agency at the point of import or cartoon open a selected package, if needed. Packaging list are often required by the importing country for custom inspection .The details of the goods contained in the packing list must agree in general terms with those in other document. It must also be signed where ever necessary. 7.4 Certificate of inspection: A certificate of inspection lends a considerable degree of comfort to the importer with regard to the specification of the goods being purchased .Importer can thus safeguard their interest by arranging for the goods to be inspected by a reputed, independent organisation prior to shipment. The inspection certificate forms a part of the document presented by the exporter to the negotiating bank .The certificate of inspection usually contains details such as weighs measurement ,composition ,quality ,packaging and bear the signature and seal of the inspecting organisation. 23

FOREX OPERATIONS
7.5 Bill of lading: In international trade shipping occupies an important place as a mode of transport. The document evidencing the carriage of goods by sea is called the bill of lading .A bill of lading is a document issued by the shipping company or its agent acknowledging the receipt of goods for carriage ,which are deliverable to the consignee or assignee in the same condition as they were received. A bill of lading is all of the following: 1. Evidence of contract of carriage. 2. Receipt of goods received by the carrier. 3. A document of title to goods, that is, a right to receive the goods therein mentioned. 7.6 Certificate of Origin: This is a declaration that specifies the country of origin of goods. They are called by the countries wishing to identify the origin of all imported goods for their own reason, i.e. statistical analysis, policy decisions or where there are quotas or other importer restrictions in force or to qualify for special rate of custom duty. It contents normally include: 1. The name and address of the consignor and occasionally the name and address of the manufacture if different. 2. The name and address of the consignee usually the buyer or issuing bank. If the bill of lading is issued to order it may also contain the actual buyer name and details. 3. The country of origin of the goods which may not necessarily be the country from which its being shipped. 4. The mode of transport may be optional but if completed must show the details of the transport document. 5. The number of package, gross or net weight, relevant shipping marks and description of goods which should confirm to other documents. 7.7 Bill of Entry: Bill of entry is the documents which are issued by custom department for import of goods and when goods can enter in the importer country .These documents specially detailed includes shipper name, importer and exporter name and details, goods declaration and custom duty explanation and authority sign of clearness of goods. 7.8 GR form/SDF form/SOFTEX form: GR form means General form, SDF means Statutory Declaration form, and these documents are issued for declaration of exports. Every transaction can be properly declared by custom or government so that they can issue those form that declared all document export goods permission by government or department. When we export certain type of software that time we can use softex form so that proper valuation of software and all declaration related that goods can be specified, for the export process this documents are essential.

24

FOREX OPERATIONS
CHAPTER 8 FOREIGN CURRENCY LOANS IN INDIA The bank grants foreign currency denominated loans against the foreign currency funds especially on account of FCNR (B) deposits. These loans are commonly called as FCNR (B) loans. Bank with a wide global presence has a large base of NRI customers depositors. Therefore; they have a large resource base of FCNR (B) schemes at very competitive rates. FCNR (B) loans are beneficial to the corporate on account of following: At times, it may entail lesser interest cost Vis-a Vis rupee borrowing. The borrower is not required to go to the international market for raising funds, as foreign currency funds are made available in India .This reduces cost of raising such funds. 8.1 Features: Corporate can raise FCNR (B) loans from the bank who are authorised dealers. The Indian corporate are allowed to raise the funds through foreign currency loans at selected Indian branches within prevailing policy guidelines of the bank/RBI.

8.2 Purpose: Corporate is allowed to obtain foreign currency denominated loans in India under the above scheme for the following purpose;

A) For meeting working capital requirements in Indian rupees: The loans can be granted after proper assessment and sanction of working capital requirements/Maximum Permissible Bank Finance (MPBF).The borrowers should have natural hedge to cover themselves for exchange risk, which are required to be borne by them. The borrowers who do not have natural hedge may also be considered. The loan can be disbursed up to 90% of the MPBF limit. Wherever borrowers are covered under the loans system for delivery of bank credit, bifurcation of MPBF limit into foreign currency loans. Loans component provided minimum period of loan is 6 months. The foreign currency loan amount is it be taken as per part of loan component provided minimum period of loan is 6 months. Foreign currency loan can be disbursed in 4 currency viz.USD, Sterling, Euro and Japanese Yen. Loan to the exporter by way of pre-shipment in foreign currency (PCFC)/post shipment credit in foreign currency (PSFC).

25

FOREX OPERATIONS

B) Import of raw material. The importer can take benefit of foreign currency loan for import of raw material in lieu of rupee MPBF sanctioned to them. The rupee equivalent of the foreign currency loan amount is to be earmarked in the overall sanctioned MPFB limit. This loan can also be repaid in foreign currency. C) Import of capital goods: The importer of the capital goods can avail the foreign currency loan for a period not exceeding 3 years including touring period. Normally, the import of capital goods shall be arranged on 180 days usance. D) Purchase of indigenous machinery: The corporate can raise foreign currency loan for their capital expenditure /project expansion plans etc for the purchase of indigenous machinery E) Repayment of existing rupees term loan: The foreign currency loans can be utilised for the repayment of existing rupee term loan provided the duration of the foreign currency loan does not exceed the unexpired portion of the existing rupee loan or 3 years whichever is less.

26

FOREX OPERATIONS
CHAPTER 9 REMITTANCES All foreign exchange transactions involve the transfer of foreign exchange either into the country (inward remittances) or out of the country (outward remittances).These transactions would either be trade or a non-trade transaction. In case of trade transaction, namely, imports or exports L/C are used to settle the transaction. In case of non-trade transaction remittances are made by using bank instruments. The bank instruments frequently used are TT, MT, and DD. 9.1 Remittances are of two types: Inward remittances. Outward remittances. A) Inward remittances: Inward remittances may arise out of: Export from India. Remittances into India by non residents for investment. Foreign travellers/tourists spending their exchange in India. B) Outward remittances: Outward remittances may arise out of: Imports. Travel of residents outside India. Remittances by foreigners employed/settled in India. Other remittances like gift, medical expenses, subscription to magazines, examination fees etc. TT: TT or cable transfer is the quickest mode of transfer of funds. In this case instructions are issued by cable to pay a certain amount of money to a specified person. A branch of the bank in a country could issue the instructions to another branch of the bank in another country or on a correspondent bank in another country .Since these are the instructions sent through cable, no signature of the authorised personnel appear and hence for the purpose of authentication the message is tested (which means it is coded) and sent to the concerned bank with whom the test key code arrangements exists. The recipient bank decodes the message and an act as per instructions given in the cable .Thus the authenticity of the cable is ensured. MT: MT is similar to TT with only one difference. The instructions are sent by means of a written order instructing the paying bank to pay a specified sum to a specified person. Since it is a written order it is signed by the authorised personnel of the bank. On the receipt of the mail transfer the paying bank will verify the signature appearing on the instrument with that appearing on the book of the authorised signatures of the banks 27

FOREX OPERATIONS
personnel and then the bank will carry on the instructions given by mail transfer instrument. DD: DD is an order to pay a certain sum of money to a certain person or to his order. In the case of foreign remittance the DD is drawn by a branch of the bank in the country on its branch in another country or on its correspondent bank.

9.2 Foreign Inward Remittance Payment system (FIRPS): FIRPS is an instrument, which is similar to a bank draft .This system of payment was evolved by FEDIA to obviate the delay and inconvenience experienced by the beneficiary of an inward remittance. The FIRPS instrument bears the facsimile signature of the chairman of FEDIA. The details of FIRPS are as under: It may be issued in payment of inward remittance in favour of residents in India and non-residents. They cannot be issued in favour of firms, associates and companies. The inward remittance received is immediately converted into Indian rupees. The FIRPS is prepared in triplicate, all three copies bearing the same serial number. The original is the actual instrument, the duplicate serves as an inward remittance certificate to the beneficiary and triplicate is the office copy of FIRPS issuing bank. The original and duplicate is both bearing the signature of the issuing bank is send to the beneficiary by courier. The beneficiary can present the instrument to his bank or nay nearby bank and obtain the payment. The inward remittance copy (the duplicate) when signed by the paying bank becomes a valid inward remittances certificate.

9.3 SWIFT: The SWIFT system of transmitting messages is widely used through out the world. The Society World Wide for Inter bank Financial Telecommunication is a co-operative society registered in Brussels. The SWIFT system enables the member banks to transact between themselves quickly 1) International payment; 2) messages connected with international banking .The transmission of messages takes place in seconds therefore this method is economical and time saving .The messages that are send by TT are usually sent as urgent SWIFT messages and those sent by MT are sent as ordinary SWIFT messages. The greatest advantage is that SWIFT message has is that the communication are sent using pre-defined structure format, hence there are no ambiguity of any sort since these formats are used all over the world on a standardised basis for conducting all types of banking transactions.

28

FOREX OPERATIONS
9.4 Format for Inward Remittances through SWIFT: The procedure for funds transfer/inward remittance is simple. All you have to do is instruct your bankers (in the country of remittance - e.g. USA) as under: Remit USD--- to HSBC BANK USA, NEW YORK for credit to A/c No.000038245 of BANK OF MAHARASHTTRA, Mumbai for further credit to NRE A/c No. --- Of ---with ---- Branch, ---- India. Swift Code of Bank of Maharashtra is "MAHBINBB". To facilitate quick and safe transfer of funds, Bank of Maharashtra maintains our accounts with 18 banks all over the world. The list of these correspondent banks with their addresses and our account details are included in the remittance message: 1. Name and address of correspondent bank abroad and corresponding SWIFT Code. 2. Amount required. 3. Our account number as mentioned in the enclosed list. 4. Our name and account details. 5. Name of branch where we have the account. For opening an account all we have to do is download and fill the Account Opening Form and submit the same at any of branches. Kindly get the form and the passport copies attested by an official from INDIAN EMBASSY/HIGH COMMISSION/CONSULATE NOTARY/CURRENT BANKERS. 9.5 FEMA has split out 1) Capital account transactions. 2) Current account transactions 1. Capital Account Transactions: Any transaction, which alters the position of assets or liabilities including contingent liabilities outside India of a person resident in India or outside India, such transactions are called as capital account transactions. The examples are Investment made abroad. Purchase of immovable property outside India, giving guarantee on behalf of non resident person. Investment by a person resident outside India for the purchase of property in India etc will be treated as capital account transaction. Opening of various types of non resident bank a/c are also treated as capital a/c transactions.

29

FOREX OPERATIONS

2. Current Account Transactions: Current account transactions include: Payments, due in connection with foreign trade, other current business, services, and short term banking and credit facilities in the ordinary course of business. Payment due as interest on loans and as net income from investments. Remittances for living expenses of parents, spouse and children residing abroad. Expenses in connection with foreign travel, education and medical care of parents, spouse, and children. FEMA Regulations for Current Account Transactions: Drawal of Foreign Exchange by any person for the following purpose has been prohibited: Transactions specified in schedule 1 or Travel to Nepal or Bhutan or Transaction with a person resident in Nepal or Bhutan should not be done. Prior Approval of G.O.I: Exchange should not be released without permission of G.O.I for transaction mentioned in schedule II. This will not apply to the transaction for payment made out of RFC a/c of the remitter. Prior approval of RBI: Transaction will require prior approval of RBI mentioned in schedule III. This rule will not apply to transaction where payment is made from RFC a/c.

9.6 Different types of rates used in foreign exchange: Different rates are used for different merchant transactions .Buying rates are quoted for purchase transaction and selling rates are quoted for sale transaction. Buying rates are further subdivided into a) Telegraphic transfer (TT) buying rate (b) bill buying rate. Similarly the principal types of selling rates (a) TT selling rates (b) Bill selling rates.

30

FOREX OPERATIONS

Graphical representation: Rates of exchanges

Buying rates

Selling rates

TT buying rates

Bill buying rates

TT selling rates

Bills selling rates

A brief explanation: 1. TT buying rates: This rate is applied for all purchase transactions where the Nostro account of the bank is credited .This rate is calculated by deducting the exchange margin from the interbank buying rate of the currency. The exchange margin prescribed by FEDIA is 0.025 to 0.08 % for TT buying rates 2. Bill buying rates. This rate is applied for foreign bills purchased .Bill transactions as you all will appreciate involve a time lag in that the bill has to be sent to the overseas centre by the banker for payment .And this period would increase if it is a usance bill (usance bills are those which are payable after a period of time say 30 days from sight, 90 days from acceptance etc).It therefore follows that this rate would be costlier than the earlier TT buying rates. 3. TT selling rates: This rate is applied for all transactions, which do not involve handling of documents by the bank. The TT selling rates is calculated by adding exchange margin to the interbank selling rate.FEDIA prescribes the exchange margin that can be loaded anywhere between 0.125 to 0.150%. 4. Bills selling rates: This rate is applied to all transactions, which involve the handling of documents by the bank, such as payment of import bills .The bill selling rates is arrived at by adding exchange margin to TT selling rate .This means that exchange margin enters twice in bills selling rate. The rate of exchange margin allowed by FEDIA on bills selling rate is 0.175 to 0.200 %.

31

FOREX OPERATIONS
CHAPTER 10 EMERGING TRENDS IN TRADE FINANCE: 10.1 BUYERS CREDIT: Under the Buyers credit the exporters bank directly finances the importer or the importers bank. The exporter gets the payment immediately. At the preshipment stage the buyers credit may take the form of the importer opening a red clause L/C authorising the exporters bank to extend pre-shipment credit to the exporter. At the post shipment stage the exporters bank would make immediate payment to the exporter by extending a loan to the importer or to the importers bank .The seller receives the amount due under the bill immediately and is not responsible for non payment by the importer. Hence the credit risk is borne by the bank .If the loan is given in foreign currency and hence would be bearing the exchange fluctuations. A) Benefits: Available in all convertible currencies[usually in USD/EUR/GBP/JVY] The supplier is independent of this process of raising the finance, they do not leave to sign any documentation and receive payment as per original contract term. Since the rate of interest is linked on LIBOR, the financing cost can be significantly lower then the cost of local borrowings. Since the buyer is able to reimburse the supplier on sight the basis, this facility affords greater bargaining power to the buyer. Importers can make use of multi currency option by availing of the buyers credit in a currency other than one in which goods are invoiced to take advantage of diffentials interest rate and forward premium. Buyers credit can be arranged irrespective of the mode of import i.e. collection or direct import. B) Bank Requirements: 1.For obtaining a quote :from the off shire point, the importer needs to provide details of value of the contract number of shipment, port of shipment, suppliers country ,average value of each shipment ,expected date of shipment and period of suppliers credit if applicable . 2. for granting the approval: ECB application duly filled by the importer. Copy of the contract between supplier and buyer or copy of L/C confirmed purchase order. A copy of invoice transports documents and a bill of entry whenever applicable. 3. Post approval: Undertaking to pay principal plus interest on due date. Undertaking to submit evidence of payment of withholding tax as applicable. Form A-2 and other documents. 32

FOREX OPERATIONS

4. Regulatory guidelines: Buyers credit can be availed only for the import of raw material or capital goods. Authorised dealers may approve proposal in form ECB for the buyers credit provided: o The credit is being extended for period less than 3 years. o The amount of credit does not exceed USD 20 million per transaction. For the amount to exceed of USD 20 million an application form from ECB to be forwarded to RBI for the approval through authorised dealers. The approval is valid only for 3 months from the date of its issue. 10.2 SELLERS CREDIT: Sellers credit or suppliers credit is the normal procedure where the exporter avails of the credit himself from the bank or uses his own funds and allow the importer to pay at a later date. The transaction is financed by the seller or the exporter, hence it is known as sellers credit. The exporter may avail of the preshipment finance from the bank and procure raw material required, process them/manufacture the goods or the finished products and ship them to the importer. At the post shipment stage he can avail of the credit facility from the bank and may permit the importer to pay in instalments. Therefore, the seller bears the risk of non payment by the importer (known as credit risk) further this borrowing would be in rupees from his bank while the contract may be in foreign currency. The exporter, therefore, also faces the risk of fluctuation of rates of exchange, when the payment is actually made by the importer (known as exchange risk). A) Benefits to the customer: The program allows the customer to play a large part in the arrangement of cheaper finance from the suppliers. Enabling the customers to program as marketing to develop stronger relationship and promote loyalty amongst their suppliers. It allows re negotiation of the contract terms with their supplier based on the cheaper funding arrangement made for them. Uses the program to complete more effectively by running as well managed supply chain. Potential to ascertain greater efficiencies in cash management and receive managements process Ability to introduce payment discipline within their channel partners. 10.3 BANK GUARANTEE: A bank guarantee consists of a legal contract where the bank is taken as a legal surety, On behalf of their customers, to pay a defined amount of money to the beneficiary within the expiry period of the guarantee in case of default of the customer.

33

FOREX OPERATIONS
A) The types of guarantee are: Bid Bond guarantee: Performance guarantee Advance payment guarantee Retention money guarantee B) Benefits: A bank guarantee provides substantial comfort to the beneficiary for establishing contracts with the supplier and contractors. Bid Bonds enable exporters to compete in international market for contracts. Advance payment guarantee enable exporters to receive advance payment in the preparation of the goods for exports. C) Bank requirements: A sanctioned credit limit for issuance of guarantees. Application for the bank guarantee to be submitted in the banks tendered format. A centre indemnity duly stamped supplied by the banks executed by the authorised signatories of the company. The text of the guarantee should clearly specify the amount validity. The guarantee should also bear the bank standard limitation clause.

D) Regulatory requirements: Certain types of guarantees cannot be issued such as: Guarantee for unlimited period and amount, except for certain exceptions. Issuance of guarantee involving foreign exchange is subjected to prior RBI approval unless specific provision is made under FEMA. Guarantee favouring overseas beneficiaries and through banks abroad can be issued only for commodity exports and have to be performed by nature.

34

FOREX OPERATIONS
CHAPTER 11 VARIOUS DEPOSIT SCHEMES AVAIABLE TO NON-RESIDENT INDIANS (NRIs) Table: 11.1 Particulars Foreign currency (nonResident) account (banks) scheme [FCNR(B)account] (1) (2) NRIs (individuals/ Who can open Entities Of Bangladesh an account /Pakistan Nationality/ Ownership Require prior approval of RBI. as on June 1st 2008 Non Resident Non-resident (External)rupee account ordinary rupee scheme account scheme (NRE Account) (NRO) Account (3) (4) NRIs (individuals/ Any person resident Entities Of Bangladesh outside India (other /Pakistan Nationality/ than A person resident Ownership Require prior in Nepal and Bhutan). approval of (Individuals/Entities RBI. Of Bangladesh / Pakistan Nationality /Ownership as well as erstwhile OCBs Require prior approval of RBI. In the names of two or May be held jointly more non-resident with residents. individuals Permitted Permitted

Joint account

Nomination Currency in which account is denominate

Type of account Period for fixed deposits Rate of interest

In the names of two or more non-resident individuals Permitted Pound sterling, US Dollar, Japanese yen ,Euro, Canadian dollar and Australian dollar Term deposits only

Indian rupees

Indian rupees

For terms not less than 1 Year and not more than 5 years Subject to cap: LIBOR/SWAP rates minus 75 basis points for the respective currency / Corresponding maturities.

Saving, current, recurring , fixed deposit At the discretion of the Bank. Subject to cap: Fixed deposits : LIBOR/SWAP rates, as on the last working day of previous month, for US Dollar of corresponding maturities.

Saving, current, recurring, fixed deposit As applicable to resident accounts Banks are free to Determine interest rates of term deposits.

35

FOREX OPERATIONS
Loans a. In India i)to the account holder ii) to Third Parties

Permitted up to Rs.20lakhs

Permitted up to Rs.20lakhs

Permitted

Permitted up to Rs.20lakhs

Permitted up to Rs.20lakhs

Permitted

b. Abroad i)to the Account holder ii) to Third Parties Permitted $ c. Foreign Currency Loans in India i) to the Account holder Permitted up to Rs.20 lakh ii) to Third Parties Not Permitted Not Permitted Not Permitted Not Permitted Not Permitted Permitted $ Not Permitted Permitted $ Permitted $ Not Permitted

Purpose of Loan a. In India to the Account holder

i) Personal purposes or for carrying on business activities. ii) Direct investment in India on non-repatriation basis by way of contribution to the capital of Indian firms / companies iii) Acquisition of flat / house in India for his own residential use. (Please refer to Para 9 of Sch. 2 to FEMA 5)

i) Personal purposes or for carrying on business activities. ii) Direct investment in India on non-repatriation basis by way of contribution to the capital of Indian firms / companies iii) Acquisition of flat / house in India for his own residential use. (Please refer to Para 6(a) of Sch.1 to FEMA 5)

Personal requirement and / or business purpose

36

FOREX OPERATIONS
11.1 Interest rates of Bank of Maharashtra: Table 11.2 Maturity 1 Year 2 Years 3 Years & above Existing rates (NRE) w.e.f. 01.05.2009 3.65 3.25 3.65 Ceiling Rate on NRE Deposit (Rounded off) w.e.f. 01.06.2009 3.35 3.15 3.75

The revised interest rates will be applicable for all fresh NRE term deposits accepted or renewed on and after 01.05.2009. NRE Saving Deposits The Interest rate for NRE Saving Deposits will be 3.50% will be continued for the period July 2008. Rates of interest for FCNR (B) deposits for the month of July 2008 shall be as under:

Table 11.3 Period 12-15-18-21 months 24-27-30-33 months 36-39-42-45 months 48-51-54-57 months 60 months Rate for USD 2.89 2.49 2.89 3.23 3.49 Rate for GBP 2.92 3.12 3.59 3.89 4.12 Rates for EURO 2.73 2.83 3.19 3.47 3.72 Rates for AUD 4.90 4.38 4.96 5.35 5.57 Rates for CAD 2.87 1.88 2.32 2.62 2.89

Please note that any Single FCNR (B) deposit in EUR, AUD, CAD will be for a minimum amount of 5000/- in the respective currencies and in GBP for a minimum of GBP 2000/Branches should seek prior approval from Treasury & International Banking Division, Mumbai before accepting fresh FCNR (B) deposits denominated in GBP, EUR, AUD and CAD for a period of 2 years and above and before accepting any deposit in AUD and CAD. Deposits are to be accepted for a minimum period of 12 months and thereafter in multiples of quarters only.

37

FOREX OPERATIONS
11.2 Exchange Earners' Foreign Currency (EEFC) Account 1. What is an EEFC Account? Exchange Earners' Foreign Currency Account (EEFC) is an account maintained in foreign currency with an Authorised Dealer, i.e. a bank dealing in foreign exchange. 2. Can the account be in term deposit form? No, the account is a non-interest bearing current account. 3. Who can open an EEFC account? A person resident in India may open the account. 4. Can one credit the entire foreign exchange earnings in this account? Yes, one can credit 100 percent of his foreign exchange earnings into this account subject to permissible credits and debits. 5. What are the permissible credits into this account? i) Inward remittance through normal banking channel, other than remittances received on account of foreign currency loan or investment received from abroad or received for meeting specific obligations by the account holder. ii )Payments received in foreign exchange by a 100 per cent Export Oriented Unit or a unit in (a) Export Processing Zone or (b) Software Technology Park or (c) Electronic Hardware Technology Park for supply of goods to similar such unit or to a unit in Domestic Tariff Area. iii) Payments received in foreign exchange by a unit in Domestic tariff Area for supply of goods to a unit in Special Economic Zone (SEZ). iv) Payment received by an exporter from an account maintained with an authorised dealer for the purpose of counter trade. (Counter trade is an arrangement involving adjustment of value of goods imported into India against value of goods exported from India in terms of Reserve Bank guidelines); v) Advance remittance received by an exporter towards export of goods or services; vi) Payment received for export of goods and services from India, out of funds representing repayment of State Credit in U.S. dollar held in the account of Bank for Foreign Economic Affairs, Moscow, with an authorised dealer in India, vii) Professional earnings including directors fees, consultancy fees, lecture fees, honorarium and similar other earnings received by a professional by rendering services in his individual capacity. viii) Interest earned, if any, on the funds held in the account; ix) Re-credit of unutilised foreign currency earlier withdrawn from the account;

38

FOREX OPERATIONS
x) Amount representing repayment by the account holder's importer customer, of loan/advances granted, by the exporter holding such account. 6. Can foreign exchange earnings received through an international credit card be credited to the EEFC account? Yes, foreign exchange earnings received through an international credit card for which reimbursement are provided in foreign exchange may be regarded as a remittance through normal banking channels and can be credited to the EEFC account. 7. What are the permissible debits into this account? i) Payment outside India towards a permissible current account transaction [in accordance to the provisions of the Foreign Exchange Management (Current Account Transactions) Rules, 2000] and permissible capital account transaction [in accordance to the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000]. ii) Payment in foreign exchange towards cost of goods purchased from a 100 percent Export Oriented Unit or a Unit in (a) Export Processing Zone or (b) Software Technology Park or (c) Electronic Hardware Technology Park and payment of customs duty in accordance with the provisions of the Foreign Trade Policy of Central Government for the time being in force. iii) Trade related loans/advances, by an exporter holding such account to his importer customer outside India, subject to compliance with the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000. iv) Payment in foreign exchange to a person resident in India for supply of goods/services including payments for airfare and hotel expenditure. 8. Is there any restriction on withdrawal in rupees of funds held in an EEFC account? No, there is no restriction on withdrawal in rupees of funds held in an EEFC account. However, the amount withdrawn in rupees shall not be eligible for conversion into foreign currency and for re-credit to the account.

39

FOREX OPERATIONS
11.3 Resident Foreign currency account [RFC A/C]: This is a scheme permitting persons of Indian nationality or origin who have returned to India for permanent settlement (Returning Indians) after being resident outside India for a continuous period of not less than one year to open foreign currency accounts against the proceeds held in NRE/FCNR accounts or funds remitted from abroad. You can open Current, Savings and Term Deposit Accounts under the RFC Scheme. However, you will not be given a cheque book facility on the RFC Savings/Current Account. The account can be maintained in any currency such As USD, GBP, DEM, JPY, EURO etc.

A) Permissible Credits Amounts of Foreign Exchange Assets including deposits with banks outside India, investments in foreign currency such as shares and securities and immovable property outside India acquired or held while you were resident outside India. Balances standing to the credit of NRE/FCNR accounts together with interest due thereon. Amount of Foreign Currency Notes and Travellers cheques brought at the time of returning to India. Currency Declaration Form (CDF) is required if the foreign currency notes exceed USD 5000 or value of travellers cheques and notes exceeds USD 1000. Dividend /Income or sale precedes of overseas foreign currency assets. Pension from abroad.

B) Permissible Debits Expenses for education abroad, Family travel, Medical expenses, Other bonafide purpose permissible under the exchange control regulations, Bank charges Transfer to other Foreign Currency Account of the depositor himself and All local payments. Nomination facility is available for RFC deposit accounts.

40

FOREX OPERATIONS
CHAPTER 12 FORWARD EXCHANGE CONTRACTS The exchange rate is not stable .By the time the exporters execute his contract and his bill is realise, the rate of exchange might have turned adverse/favourable for him and may bring unexpected loss/profit. But the fact what an exporter would receive on execution remains uncertain. The importer too faces exchange risk when the transaction is designated in a foreign currency. The risk is that the foreign currency may appreciate in value and he may be compelled to pay in local currency an amount higher than that was originally contemplated. This uncertainty about the rate that would prevail on future date is known as the exchange risk. 12.1 Forward contract: Forward contract is a mechanism through which the rate is fixed in advance for purchase or sale of foreign currency at a future date. In such an arrangement, the risk of loss which might accrue on account of adverse movement in the rate of exchange is sought to be removed. Forward contract can therefore defined as a firm and binding contract entered into by two parties normally a banker and his customer, for purchase or sale of specified amount of foreign currency at an agreed rate of exchange for delivery and payment at a future date or during the period agreed upon at the time of entering into the forward deal. The rate specified in forward contract is also called forward rate. On 1st June the bank makes a spot purchase and forward sale of the same currency and same value .This is a swap deal .The difference between the rates at which the currency is purchased and sold in a swap deal is a swap difference. The swap difference may be a swap loss or a swap gain .If the bank buys high and sells low it is a swap loss and is recoverable from the customer .If the bank buys low and sells high it is a swap gain and is payable to the customer. a) This is how it works: On 1st May Bank of Maharashtra entered into an agreement with its customer Crompton Greaves for a forward purchase of Euro 10000 delivery 1st July at the rate of Rs.43.32 per Euro covering itself by a forward sale at Rs.43.37 .On 1st June the customer requests the bank to purchase euro 10000 under the said forward contract .So amount that would be paid to the customer assuming the following rates in the interbank markets on 1st June Spot Euro 1= Rs.43.2875/3875 Delivery July =Rs.43.4525/5525 Interest on outlay of funds may be assumed @ 12 percent per annum.

41

FOREX OPERATIONS

In such a case the bank would purchase Euro 10000 from customer at the agreed rate of Rs.43.32 per euro. Charges to get early delivery would be debited to the customer. Bank of Maharashtra sells to the market euro 10000 it has purchased at the rate of Rs.43.2875.It buys from the market delivery July euro at Rs.5525 to meet its commitment.

A) Swap difference: Bank sells at: Rs.43.2875 It buys at: Rs.43.5525 Swap loss per Euro: Rs.00.2650 Swap loss on Euro 10000 is Rs.2650 B) Interest on outlay of funds: Bank sells to the market: Rs: 43.2875 It buys from the customer: Rs: 43.3200 Outlay of fund per euro: Rs.0.0325 Outlay of funds on 10000 is Rs.325 Interest on outlay of funds on Rs.325 for 30days @ 12% (1st June to 1st July) is Rs.3 C) Charges for early delivery: Swap loss: Rs.2650 Interest on outlay of funds Rs.3 Charges as per FEDIA Rs.100 Total Rs. 2753 Crompton greaves account will be credited towards the proceeds of the bill of euro 1000 at Rs.43.32, that is Rs.43, 2200 and its account will be debited with Rs.2753. 12.2 Fixed Forward Contract and Option Forward Contract: Forward contract would either be a fixed forward contract or option forward contract .In a fixed forward contract, the transaction will have to be completed on the specified forward date. In option forward contract, the option period of delivery should be specified and should not exceed a period of one calendar month. How to book a forward contract: As a customer first we should find out the forward rate of the currency concerned by giving the particulars to bank as: 1. The currency for which forward is booked. 2. The period of forward cover. (2 months, 3 months, etc) 3. Delivery period you require. 4. Nature and tenor of instrument.

42

FOREX OPERATIONS
If the forward rate of exchange quoted is acceptable, you need to submit an application for booking of forward contract by submitting documentary evidence such as sale contract or letter of credit. The original and duplicate forward contract would be issued to us, we need to check whether they are in conformity with the requirements that you have sought .If they are correct, sign the duplicate copy and hand it over to the authorised dealer while retaining the original .Now however you want to put up the transaction it is at our option and the transaction would be done at an agreed rate. 12.3 Cancellation of forward contract: A)When a forward purchase contract is cancelled on the due date it is taken that the bank purchase at the rate originally agreed and sells the same back to the customer at the ready TT rate.The difference between these two rates is from/paid to the customer. If the purchase rate under the original forward contract is higher than the ready TT selling rate the difference is revocable to the customer. If it is lower the difference is revocable from the customer. The amount involved in purchase and sale of foreign currency are not passed through the customers account .Only the difference is recovered/paid by the way of debit/credit to the customers account. B) In the same way when a forward sale contract is cancelled it is treated as if the bank sells at the rate originally agreed and buys back at ready TT buying rate, the difference between the two is recovered from /paid to the customers. 12.4 Early cancellation: If a forward purchase is required to the customer earlier than due date it would be cancelled at the forward selling rate prevailing on the date of cancellation .The due date of this sale contract to synchronise with date of the original forward purchase contract.

43

FOREX OPERATIONS
CHAPTER 13 STATEMENT 13.1 XOS STATEMENT An authorised dealer should submit the details of overdue export bills to reserve bank of India in statement form XOS as per guidelines given below: It includes export on cash basis and deferred payment basis. 1.All export bills outstanding beyond six months from the date of shipment/due date of realization or instalment of deferred payment export(including interest) should be reported in this statement including the following case where: a) The exporter has sought permission from RBI for delayed realisation of bill or b) The RBI has granted general permission to realise bills late due the status of the exporter or in any other way. 2. The statement should be submitted on half yearly basis giving position of overdue bills as on 30th June and 31st December and submitted on RBI within 15 days from the close of the half year. 3. The statement should be submitted in triplicate. 4. Where the part of the export bills has been realised, only the amount of bill remained unpaid should be reported in the statement. 5.The export bill should be treated as overdue if it has not been paid on due date .The sight bill should be paid on or before N.T.P. (Normal Transit Period) and usance bill should be paid on due date as per the usance period. 6. Only those bills, which are not paid within 6 months from the date of shipment, should only be reported in XOS statement. a) It includes export bills purchased, negotiated, discounted and sent on collection basis. b) The bills which are not realised or written off, should continue to be reported where as those, which have been realised during the half year, should be deleted. c) Branches should make vigorous follow up with the exporter and keep copies of follow up on round.

44

FOREX OPERATIONS

13.2 BEF STATEMENT All importers, who are importing goods in India, are required to submit documentary evidence in support of the physical import of goods made in India. The A.D. through whom the remittance of import was made should follow up with the importers for submission of evidence of import. The importer should furnish evidence within three months from the date of remittance. It will be the exchange control copy of customs bill of entry wrapper or postal wrapper. If the importer are companies with net worth not less than Rs.100 crores and listed on stock exchange, a certificate of CEO or auditor of the company may be accepted in lieu of evidence of import .The certificate may be accepted only for import up to US$ 1 million. If the import is non- physical (import of software), a certificate from Chartered Account may be obtained stating the import of software etc has taken place. In case ,the documentary evidence as mentioned above not submitted, then the A.D. should follow up with the importer for another three months by sending reminder by ordinary post and finally by registered post and finally importer does not comply then the A.D should report the matter to RBI in BEF statement. BEF is a half yearly statement to be submitted by the A.D. as at the close of June and December every year .This statement should be submitted to RBI within 15 days from the close of the relatives half yearly and in duplicate to regional office of RBI under whose jurisdiction the branch is functioning. Documentary evidence so received should be properly recorded and preserved by the branch and internal auditors have to make 100% verification of documents obtained by the import remittances. Bill of entry form should be normally preserved only for one year from the date of verification. But in case an investigation is going in respect of the import transaction; such a bill of entry form should be preserved and should be destroyed till clearance from the agency taken. Bill of entry may be sent to the relative customs authorities to verify their authenticity. Part-I of the statement relates to entries for the current half year while Part II relates to the receipt of BEF earlier reported.

45

FOREX OPERATIONS

13.3 R-RETURN The information about the inflow and outflow of foreign exchange is of great importance to govt. of India and Reserve Bank of India for making policy decisions. As a member of international monetary fund, the Central Government has an obligation to present the quarterly balance of payment (BOP) statistics to IMF.The BOP data should be published within three months from the close of quarter as per Special Data Dissemination Standards (SDDS) prescribed by IMF and accepted by Government of India. Returns and statements prescribed are used by Reserve Bank of India for compiling valuable data relating to the countrys financial transactions with the external world as well as for exercising supervision of the operations of the authorised dealer through data reported by the R-Returns. The R-return also serves as a means of post factor scrutiny by Reserve Bank of India to ensure that A.Ds have correctly exercised the power delegated to them under general or specific authority. Office/ branches of authorised dealers, which are authorised to transact foreign business, are classified into three categories, which are as follows; CATEGORY A: These are the office and branches maintaining in their own name independent foreign currency account with overseas correspondents/branches. CATEGORY B: Offices /branches not maintaining independent foreign currency account but having powers of operating on the accounts maintained by their head/principal office or any other link office. CATEGORY-C: All other offices and branches handling foreign exchange business through other branches in category A and B but having powers to operate on the accounts maintained abroad by their head offices. Maintenance of Records: Accuracy and strict observance of the periodicity is of the importance in the system of RReturns reporting. The authorised dealers should maintain proper records of all purchase and sales of foreign currencies made by them in systematic manner on daily basis. Uniform Code Number allotted to A.D. branches: Part I (7 digits) of uniform code number allotted to the reporting office branch of authorised dealer should be indicated on the top of R-Returns reporting .Any existing branch having code number but which his not transacting foreign exchange business may use the number allotted to it as and when it starts transacting such business at a future date .

46

FOREX OPERATIONS

Time limit for submission of R-RETURN: R-Return should submit twice in a month on 15th and last day of the month. If 15th or last month on calendar date is a holiday then the return should be submitted on the preceding working day. The R-return must reach RBI within 7 calendar days from the close of period to which they may relate .Authorised dealing branches should, however make all efforts to submit the R-Return as quickly as possible, without waiting for the last and avoid delay in submission of return to RBI. If in any forth night, there are no transactions to report, a nil return should be submitted in the prescribed time period. Authorised dealers should ensure that the R-Returns are submitted to RBI reflecting the correct and complete position of the transaction. All the relevant transaction should be reported in the statements with all the supporting documents and forms. Any contravention to reserve bank of India direction or failure to file returns as specified may attract fine from RBI. Reserve Bank of India may take a serious view of the failure of any branch of authorised dealers to furnish return statement and if not submitted regularly or promptly, they will find irregularities during complication and where it deems fit it may impose financial penalty or even direct the authorised concerned from transacting foreign exchange business at the business concerned. R-Return should be submitted to the regional office of the exchange control department of RBI under whose jurisdiction the branches /offices concerned of the A.D is situated.

47

FOREX OPERATIONS

Chapter 14 FOREX FACILITIES IN BANK OF MAHARASHTRA Credit facilities available by the bank is as follows: The Bank finances the corporate sector for its business activity and for setting up units, modernisation, and diversification and up gradation. Such finance is extended in the form of Funded facilities Non Funded facilities Funded Facilities Term loans Cash credit Bill discounting 1. Term loans: Repayment in instalments over a fixed time. Purpose: For acquisition of fixed assets / machinery or for financing projects. Amount of loan: For acquisition of fixed assets / machinery or for financing projects. Security: Charged on assets.

2. Cash credit: Running account facility. Purpose: To meet working capital requirements. Amount of facility: Based upon the Bank's assessment of the working capital requirement. Security: Charge on current assets, collaterals if required.

3. Bill discounting: In the nature of post sales limit. Amount of facility: Generally up to a specified percentage of the value of the bill. Discounting under: Letter Of Credit or firm order. Security: Charge on the Bill, Collateral if required.

48

FOREX OPERATIONS

Non-funded facilities:

Letter of Credit facility to facilitate purchase of material / goods. Letter of Guarantor facility for the issuance of Guarantee in the nature of bid bonds, performance bonds, etc.

For finance of International trade, the Bank provides Working Capital facility to Exporters Importers For Exporters: Working Capital finance can be availed at Pre-shipment stage Post shipment stage At the pre-shipment stage finance is provided in the form of Packing Credit Purpose: For procuring / manufacturing of goods meant for export. Amount of Packing Credit: Up to 90% of FOB value of goods. Security: Charge on assets created out of finance. Repayment: From Export proceeds, Proceeds of negotiation / Discounting of Export Bills. At the post shipment stage export finance is provided by way of Negotiation / Discounting of Export Bills, Rupee advances against collection bills, Advance against Export incentive. The advances are repayable from Export proceeds or receivable and carry interest rate in conformity with RBI guidelines. Export finance is also provided in foreign currency at internationally competitive interest rates. Interest Rates are linked to LIBOR and are subject to maximum LIBOR + 1.5%. Finance in foreign currency is extended by way of Pre shipment Credit in foreign currency at the preshipment stage and Discounting of Export Bill in foreign currency at the post shipment stage. For Importers Funded Working Capital finance by way of cash credit facility and non funded Working Capital finance by way of Import Letter of Credit facility is provided to corporate who are importers.

49

FOREX OPERATIONS

FOREIGN CURRENCY LENDING: The Bank also extends short term foreign currency loans to importers / Resident Constituents. This enables accessing of finance at internationally competitive interest rate linked to LIBOR. BPLR (Benchmark prime lending rate): 12.50% W.E.F 15/4/2009

Mahabank GOLD CARD SCHEME FOR EXPORTERS: Objective of the Scheme: To provide better terms of credit including rates of interest to all eligible exporters, including those under small and medium sector, compared to those extended to other exporters by the Bank. Eligibility: All exporters, including those under small and medium sectors, would be covered under the scheme provided: 1. Their accounts are classified as "STANDARD" continuously for 3 immediately preceding years. 2. Their names do not figure in RBI's defaulter list / caution list and they have not been blacklisted by ECGC. 3. There are no overdue in pre-shipment export credit. 4. They have not run up losses continuously for 3 immediately preceding years. 5. They do not have overdue export bills in excess of 10% of the current year's turnover. Benefits to Exporters: 1. Limits will be sanctioned in-principle for 3 years, with a provision for renewal, subject to satisfactory compliance with the terms and conditions of sanction stipulated by the Bank. 2. A standby limit to the extent of 20% of the assessed limit will be made available to the Gold Card holders for meeting urgent credit needs for executing sudden orders. 3. Requests for Packing Credit in Foreign Currency (PCFC) from Gold Card holders will be given priority. 4. Rate of interest will be 0.25% lower than the rate applicable for normal exporters. (The extant interest rate of the Bank for pre-shipment credit up to 180 days and post-shipment credit up to 90 days is 8 %. Gold Card holders shall be charged an interest rate of 7.75 % for these credit facilities for a like tenor.) 5. Rate of interest applicable for up to 90 days on post-shipment export credit, (in the extant case 8 %, 7.75 % for Gold Card holders), will be extended for a maximum period of 365 days. 6. In case of unanticipated export orders, norms for inventory will be relaxed taking into account the size and nature of export order. 7. Service charges stipulated for Gold Card holders will be 25% lower than the charges recovered from other exporters. 50

FOREX OPERATIONS
Tenure: The Gold Card will be issued for a period of 3 years and will be automatically renewed for a further period of 3 years provided no adverse features, irregularities are noticed in the account. Reporting for the FEX BUSINESS: Table: 14.1 During current month IMPORTS FABP FIBC Total Imports Outward Remittances EXPORTS FOBN FOBC Total Exports Inward Remittances FCDL Disbursed Forward Contract Cancelled PCFC Disbursed Total Where: FABP: Foreign Accepted Bill of Purchase. FIBC: Foreign Inward Bill of Collection. FOBN: Foreign Outward Bill Negotiation. FOBC: Foreign Outward Bill Collection. FCDL: Foreign Currency Denominated Loan. 1925 1275 3200 150 27 1985 2012 610 150 37 16 6175 (Rs. in lakhs) Cumulative business
From 01.04.08 to 31.03.09

5690 8615 14305 4209 2335 16016 18351 7100 300 503 106 448

51

FOREX OPERATIONS
CASES Case No: 1 When advance payment made by the importer: Importers Name: Kirloskar Oil Engine Ltd A-11/1 LE plant M.I.D.C Ambad, Nasik Exporters Name: GEBR STEIMEL GMBH &Co., Germany. Contract Details: Importer purchases machinery worth Euro 436.0 and by considering their long term relation, the Importer decides to pay full payment in advance before the goods are received. Documents submitted by importer to the bank: Purchase Order. A-1 form. Declaration Form.

Bank Procedure: The bank procedure is very simple for advance payment by the importer, as mentioned earlier there is a long relation between importer and exporter so the importer decides to make full payment in advance to the exporter. Bank receives all documents and intimation from the Kirloskar Oil Engine Ltd, who is the importers in this case; as Kirloskar are old customers of Maharashtra bank, just the purchase order is necessary document needed by the bank here. Especially in this case by chance there is a long relations between exporter and importer also bank and importer, which is very good thing for the importer. Bank receives money from the importer before hand and on due date they remit the money to the exporter and the transaction takes place.

52

FOREX OPERATIONS
Case No.2 Transaction under Letter of Credit: Importers Name: Crompton Greaves Ltd A-3 M.I.D.C., Ambad, Nasik Exporters Name: Korea Electro technology Research Institute, Changwan, South Korea. Contract Details Importer purchases a good from exporter worth USD 90808 .Both of these companies are entering in transaction for the first time so they decided to firstly give a bank guarantee for payment, so importer makes a application to the bank for issue of letter of credit (documentary credit) and after receiving the L.C. exporter can deliver goods as per L.C. terms& date. Goods receiving date to importer 15.06.08 and exporter allowed credit period till15.09.08 i.e. the maturity date. Documents submitted to the bank: Purchase order. A-1 form. Declaration form. Invoice bill Certificate of origin Bill of entry. Advising Bank: WOORI Bank, Korea. Mode of Payment: irrevocable L.C. at sight. Bank procedure: In this case, firstly bank issues L.C. as per bank rules and regulations. Basically for new customer bank advices to deposit his account minimum 115 % amount of transaction and for old customers bank gives some facility to the customer as per their rules. After issue L.C. bank intimates to the exporters bank and exporter bank gives advice to the exporter to receive a L.C. from importers bank after assuring of payment, exporter makes goods as per importers terms or as per L.C. terms and on due date bank remits money to exporter bank and the transaction takes place .

53

FOREX OPERATIONS
Case no.3 Export finance Name of the account : Sri Scaffolding Pvt. Limited. Branch /region/circle : Nasik city/Nasik/Pune Business activity Items : Manufacturing and export of scaffolding Category : Priority SSI Request for Credit facilities as under: Table: 14.2 Nature of facility Cash Credit Packing credit Post-shipment Bill-Discounting Term Loan Loan Bank Guarantee Total Rs.in lakh Increase/decrease +50

Existing 20.00 30.00 40.00 50.00 10.00 2.70 40.00 192.70

Proposed 70.00 30.00 40.00 ----10.0 2.70 40.00 192.70

-50 -------

Group/Exposure limits status: Table: 14.3 Exposure on Applicant company/borrower Other group concern Total to group Date of last sanction: 24.03.2006 Security: Primary : Hypothecation of Stock and Book Debts Rs. Collateral: Equitable mort. Of factory Land building and hypo. Of machinery Rs.63.11 lakh latest valuation for the above property is called for. Collateral cover % Credit risk rating Rate of interest : 32.75% : BBB (31.03.07) : 2% above BPLR minimum 15.25% Rs.in lakh Prudential Limit xxx

Fund 192.70 ---192.70

Non fund -------

Total 192.70 --192.70

Borrowers profile: Product dealt with : Manufacturing of U-frame Scaffolding, shattering plates, and ladders. Date of incorporation : 1995

54

FOREX OPERATIONS

Address: Registered office Factory Constitution Name of guarantors

: B-5 Nellai Apartment, Swastik Park, and Chembur Mumbai. : E-1, M.I.D.C, Ambad, Nasik -422010. : Private Limited Company. : All directors and guarantors.

Position with reference to RBI defaulters list in respect of the borrower/ Director/ guarantors: Name of the borrower /director does not appear in RBI defaulters list. Change in management if any from date of last review/sanction: Not Applicable. Financial analysis Balance sheet Spread: Table: 14.4 Particulars 31.03.04 31.03.05 Audited Audited Local Sales 46.17 129.41 Export Sales 338.12 420.86 Total Sales 384.29 550.27 3.82% 43.19% %Increase/Decrease O.P.B.I.D.T 33.87 34.33 Net Profit 16.96 11.16 4.41 2.02 % to Net Sales Tax provision --0.60 Net profit after tax 16.96 10.56 Cash Accruals 22.45 17.23 Tangible net Worth 58.80 66.70 Quasi Equity 34.94 27.50 Total Own funds 93.74 94.20 Outside Liabilities 148.30 180.31 Own funds 1.58 1.91 Current Assets 148.33 186.28 Current Liabilities 135.08 164.15 Net Working Capital 13.25 22.13 Current Ratio 1.10 1.13 Assessment of credit requirements: 1. Term Loan: No additional term loan has been sought by the company. 2. Working capital: Fund based

31.03.06 Audited 71.47 132.18 203.65 -ve 23.89 5.94 4.08 3.28 2.66 12.14 69.36 28.00 103.30 257.70 2.49 278.94 245.09 33.85 1.14

31.03.07 Audited 276.95 180.33 457.28 124.54 37.13 13.27 2.90 6.58 6.69 19.04 73.56 21.85 95.41 208.15 2.18 222.16 192.85 29.51 1.15

Rs.in lakh 31.03.08 Estimated 400.00 300.00 700.00 53.07 55.85 22.79 3.25 7.52 15.27 28.16 88.81 27.00 115.81 337.51 2.91 356.16 301.16 55.0 1.18

55

FOREX OPERATIONS
Method applied: Projected Working Capital Gap Method. Summarised working based on the accepted levels: Table: 14.5 Sr. Particulars no 1. Total current assets 2. Core Current liabilities 3. Working Capital Gaps 4. Min.NWC-25% of W.C. gap 5. Actual NWC level 6. 3-4 7. 3-5 8. MPBF (Min 6/7) 9. Actual bank borrowings 10. Excess bank borrowings Rs.in lakh 31.03.08 Estimated 356.16 161.16 195.00 48.75 55.00 146.25 140.00 140.00 140.00 ---

31.03.05 Audited 186.28 73.86 112.42 28.10 22.13 84.32 90.29 84.32 90.29 5.97

31.03.06 Audited 278.94 105.09 173.85 43.46 33.85 130.39 140.00 130.39 140.00 9.61

31.03.07 Audited 222.16 89.95 132.21 33.05 29.51 99.16 102.70 99.16 140.00 40.84

It may be noted that above excess borrowings are appearing after 25% as minimum stipulated margin. In fact for all the export finance limits bank is applying margin of 10% of the order and allowing the finance acoordingly.The excess borrowings are due to the reason co. was facing labour problems in the year 2006 and during the year 2007 co. settled down . In the estimated co. estimating good results. We are not increasing our exposure but only re-arranging the facilities within the sanctioned limits. The projected export sales Rs.300.00lacs The cost of production as per the projected figures submitted. 80% of the projected sales Rs.240.00 lakh. It takes 4 months time from production to realisation period (lead time). Required working capital Rs.240.00lacs/3 = 80.00 lacs Less margin 10% = 8.00 lacs MPBF =72.00 lacs Loan applied =70.00 lacs PCFOBN =70.00 lacs 3. Non-Fund limits: not applicable Bank guarantee: existing BG limit of Rs.40 lacs to be continued. Letter of credit: not applicable Delegation: The total exposure to the group is Rs.192.70lacs.All other assets are standard assets. Hence the facilities of total Rs.192.70 lacs to be granted to Sri Scaffolding Private Limited are within the delegated sanctioning powers of assistant general manager, Nasik city.

56

FOREX OPERATIONS
Recommendations: In view of the foregoing bank recommends for sanctioning the noted credit facilities to Sri Scaffolding Private Limited on the terms and conditions details here under: a) Fund based: Cash Credit Limit of Rs.70.00 lakh for local sales. The bill discounting of Rs.50.00 lakh are converted into CC working capital limit. Purpose: working capital for local sales. Margin : 25% in banks favour. Rate of interest: 2% over BPLR minimum 13.75% at present. Security: Hypothecation of stock and book debts (local sales) b) Fund based: Packing Credit cum FOBN/FOBP limit of Rs.70 lakh for export sales. Purpose: working capital for export sales. Margin: 10% in banks favour. Rate of interest: 8% p.a. Security: hypothecation of stock and book debts (export sales) Risk evaluation and SWOT analysis: Strength: 1. Unit is progressive unit having good export potential. 2. The company is having good export orders on hand as well as the local orders. The customers base of the company is well diversified. 3. Even though there is some delay in realisation of export bills, all the P.C.s are squared off through proceeds only. 4. In spite of labour problems in the factory, the company is expecting to earn the profits during the year. 5. Directors are well experienced and the sales net work is spread. 6. After set back in the past the company has wiped out its losses and has started to build up free reserves. Weakness: 1. The company had earlier suffered the setback in past. 2. The company has suffered due to labour problems and coming up. 3. The net worth is in the form of revaluation reserve. 4. Collateral security is not sufficient to cover our fund based facility. Opportunities: The company has faced labour problems. The period of packing credit has been extended. The amount is expected to be recovered by march-06.The B.D. limit asked by the applicant will be against the bills drawn on Shapoorji Pallonji(Tata Group).In view of this we may help the company to come out of the problem and to safeguard the banks interest. Threats: Bank feels that this is proper time for supporting the company as the company is coming up in a sound manner.

57

FOREX OPERATIONS

Case No.4 Import Finance The company is enjoying CC facility of Rs.160.00 lakh and letter of credit facility of Rs.140 lakh and has submitted proposal for renewing of existing facilities only. The company approached for increasing the existing LC limit, since there was sharp increase in the imported raw material i.e.TBT, TOT which is the basic material for producing liquid stabilizers. Therefore one of the major raw material supplying companies at Germany, informed about its temporary shut down for system & process updating and as such request the company to book order, in advance, so as to avoid the delay in supply. Name of the account Branch /region/circle Business activity Items Category Request for Table: 14.6 Nature of facility Cash Credit Letter of credit Bank guarantee Total : S.V.Plastochem Pvt. Limited. : Nasik city/Nasik/Pune : Manufacturing of PVC stabilizers. : Priority under SSI : Enhancement of Credit facilities as under: Rs.in lakh Increase/decrease 115.00 270.00 0.00 385.00

Existing 160.00 140.00 9.00 309.00

Proposed 275.00 410.00 9.00 694.00

Group/Exposure limits status: Table: 14.6 Exposure on Applicant company/borrower Other group concern Total to group

Fund 160.00 ---160.00

Non fund 149.00 --149.00

Total 309.00 --309.00

Rs.in lakh Prudential Limit xxx

Date of last sanction: 18.03.2005 Security: Primary : Hypothecation of Stock and Book Debts as per the stock statements as of 31.05.08 Stock Rs.361.91 lakh Receivables Rs.486.42 lakh Creditors Rs.535.19 lakh Collateral: Equitable mort. Of factory Land/building and hypo. Of machinery Rs.172.72 lakh latest valuation for the above property is called for. : 37.76% 58

Collateral cover %

FOREX OPERATIONS

Credit risk rating Rate of interest Borrowers profile: Date of incorporation Address: Registered office Factory Constitution Name of guarantors

: AAA (31.03.07) : BPLR - 1.25% i.e. 12%p.a. at monthly rests. : 15.09.1997 : A-1/2 Shriramkunj Complex, Takli Road, Nasik-422011. : Gat No.603, Jaulaka Road, via 10th mile, off NH-3, Janori. : Private Limited Company. : All directors and guarantors.

Position with reference to RBI defaulters list in: Name of the borrower /director respect of the borrower/Director/guarantors does not appear in RBI defaulters list. Change in management if any from date of last review/sanction: Not Applicable. Comment on conduct of the account: Overall conduct of the account is satisfactory. Sales are reflected in the account and there is no incidences of return of cheque in the account .The LC commitments are met on time. However due to temporary shutdown of the supplying overseas company and increasing cost of raw material. Company was required to open LC over and above he sanctioned limit for import of raw material. Financial analysis Balance sheet Spread: Table: 14.7 Rs. in lakh 31.03.07 31.03.07 31.03.08 31.03.09 Particulars 31.03.05 31.03.06 Audited Audited Projected Audited Estimated Audited Net Sales 833.07 774.19 1150.0 1156.231 1793.00 2800 %increase / 7.91% 7.91% 16.16% 49.34% 55.07% 56.16% decrease OPIDT 125.27 117.13 142.00 133.57 301.58 440.54 % to net sales 15.03 15.13 12.34 11.55 16.82 15.73 Net profit after 75.07 82.48 80.00 77.88 182.06 265.30 tax %to net sales 9.02 10.65 6.96 6.74 10.15 9.48 Cash Accruals 85.52 92.93 95.00 86.97 190.26 282.30 Tangible net 282.99 365.46 443.00 448.37 630.44 895.74 worth excluding revaluation res. Quasi Equity 21.36 21.00 21.00 20.04 20.00 20.00 Total own funds 304.35 365.47 464.00 448.38 630.44 895.74 Outside liability 325.38 246.43 392.00 335.47 530.61 981.57 Own funds 1.07 0.67 0.85 0.75 0.84 1.09 Current assets 572.12 49887 741.00 697.33 1087.61 1752.87 Current 230.43 137.02 260.00 227.53 424.04 875.00 liabilities 59

FOREX OPERATIONS
Net working 341.69 361.85 481.00 469.80 capital Current ratio 2.48 3.64 2.85 3.06 Assessment of credit requirements: Term loan: no such request Working capital: Fund based Method applied: projected working capital gap method. Summarised working based on the accepted levels: Table: 14.8 Sr. Particulars no 1. Total current assets 2. Core Current liabilities 3. Working Capital Gaps 4. Min.NWC-25% of current assets 5. Actual NWC level 6. 3-4 7. 3-5 8. MPBF (Min 6/7) Rs. in lakhs 31.03.09 Projected 1752.87 605.00 1147.87 438.21 871.95 709.66 280.92 280.92 801.61 2.56 1147.87 2.00

31.03.07 31.03.08 Audited Estimated 697.33 1087.61 165.41 286.00 531.92 801.61 174.33 271.90 445.00 647.65 357.59 529.71 86.92 153.96 86.92 153.96

Bank Guarantee: The company avails the bank guarantee limit of Rs.9.00lakh at present. The balance in the account is Nil. We do not propose any additional limit. We propose to continue with existing BG limit of Rs.9lakh. Import Letter of Credit: The company is importing raw material like TBT, TOT, IOTG, and EHTG to manufacture liquid stabilizers. The liquid stabilizers are more profitable and hence the company has developed and manufacturing liquid product, based on imported raw material. The assessment of import LC limit is as under: (Rs. In lakh) Total annual sales accepted by the bank for 2007-08 3100.00 Sale of goods manufactured from imported R.M. 1860.00 (Constituting 60% of the sales) Raw material for above mentioned goods (80% of cost of goods) 1488.00 Less import duty @7.5 % of raw material 112.00 CIF value of imported raw material 1376.00 Lead period 20days Credit period 90days Requirement of L.C. limit =1376*110/360 420.44 Present Limit Limit applied 60 140.00 410.00

FOREX OPERATIONS

As the cost materials have increased and sales are also increasing there for requirement import LC limit be considered to the extend of Rs.410.00lakh. Delegation The total exposure to the group is Rs.694.00 lakh. All other assets are standard assets, Hence facilities of total Rs.634.00 lakh granted to S.V.Plastochem Private Limited are within the delegated sanctioning powers of General Manager Pune circle, Pune for enhancement of existing facilities of the account. Recommendations: In view of the foregoing, we recommend for renewal of existing credit facilities to S.V.Plastochem Private Limited on the terms and conditions details here under: a) Fund Based: 1) Cash Credit Limit: Rs.275.00 lakh (two crores seventy five lakh.)(Enhancement of existing limit) within above limit. Sub limit of Rs.10lakh being availed at our T.H.Kataria Marg Branch Manager, Mumbai. Purpose: Working capital Margin: Minimum 25% on stock and bad debts. Rate of Interest: BPLR-1.25% i.e. 12% with monthly rests. Security: Hypothecation of fully paid stock and book debts not exceeding 120 days. b) Non Fund Based: Import Letter of Credit: Rs.410.00 lakh on DA/DP basis of 120 days Purpose: Import of raw material. Margin: 10% cash margin Security: Hypothecation of goods under LC Bank Guarantee Limit: Rs.9.00 lakh (Renewal of existing limit) Margin: 10% by way of Term deposits Commission: Regular commission charges to recover. Risk Evaluation: SWOT Analysis: Strength: 1. The profitability is good and improving smoothly. 2. The company is solely banking with bank since last 5 years and the experience about the utilisation of the limit as well as repayment of loan instalments is satisfactory. There are no forced loans or overdrafts in the payment of LCs. 3. Both the directors are technically qualified and experienced to manufacture quality products. 4. The product manufactured is high value imported substitute items. 5. The collateral security available is sufficient to cover funds dues. 6. The company is trying to explore the export market also. 7. Range of the products and also the customer base is diversified. 8. Liquidity position of the company is satisfactory. 61

FOREX OPERATIONS

Weakness: 1. Availability of the collateral security is not sufficient to cover funded +non fund base facility. 2. Required raw material is imported which is subjected to Govt.import policy, exchange fluctuation and international market force. Opportunities: Since the product manufactured by the company are import substitute items there is good demand for the products and the company has a bright future. Threats: In the competitive market, wide fluctuations in the cost of raw material.

62

FOREX OPERATIONS
Chapter 15 FINDINGS AND OBSERVATIONS Banks foreign operations include import finance, export finance, foreign remittances and other financial services. Bank totally depends on SWIFT system and on new operating system. In case of failure of this system, bank does not have any other option but to stop working. Banking system is not user-friendly. To operate this system, an employee needs special training. Bank has laid some policies in case of remittance for old and well known customer and also new customer in order to create long term relations with new customers. Bank always tries to increase foreign currency deposits through NRI a/c, FCNR (B) a/c, NRO a/c. Bank of Maharashtra charges are very reasonable, which attracts max customers and the old customers are retained. Customers are highly satisfied with the services rendered by the bank. The International Chamber of Commerce (ICC) , Paris has recently finalised the transaction of UCPDC 600 instead of UCPDC 500 .The main aim of the ICC in revising the provisions was to : o Reduce misinterpretations. o Reduce the number of articles by clubbing them and deleting the repetitive ones. o Define the articles in much clear and simplified language. o Take advantage of the technology. The procedure of import and export credit is flexible and very simple to understand to exporters and importers.

63

FOREX OPERATIONS
Chapter 16 SUGGESTIONS

Many exporters are not aware of the various policies of ECGC .The bank should make the available the information regarding the various policies.

Bank should focus on and increase its operations in currency changing as there is a lot of space in this activity, as many specialised players have entered in this activity.

Bank should promote and co-sponsor workshop seminar on import and export business credit facilities available for export and import of goods and services, risk management while exporting and importing, various opportunities available for benefits of existing and potential exporters.

Today customers need fast services, so bank must try to increase efficiency, quality of services and minimum transaction time of settlement.

The bank should adopt other option to system when it is down or not able to use. This will save the labour hours and transaction will not stop at that time.

The banks employees cannot adjust to high system and technology so they need training to get accustomed to it and perform efficiently.

Bank should provide the facility to open foreign deposit a/c at all branches. Banks must try to know and satisfy its customer needs better. Bank should try to attempt in good faith to resolve any disputes or differences with customers by setting up complaint redressal cells within the organisation.

To provide customers with accurate and timely disclosure of terms, costs, rights and liabilities as regards loan transactions. To spread general awareness about potential risks in contracting loans and

encourage customers to take independent financial advice and not act only on representation from the bank.

64